Cross-Border Money Flowing Freely Into Leading U.S. Real Estate Markets

Cross-border investors played a major role in the first quarter of 2014 as rebounding investment sales activity reached into a growing number of U.S. commercial real estate markets and property sectors.

With concerns over rising interest rates subsiding, a stronger influx of foreign and alternative capital has continued to streamg into domestic property in search of higher yields, according to analysts and executives for U.S. REITs, CRE services firms and fund managers.

Property services giants like JLL, CBRE and HFF are benefitting from a projected 15% bump in property sales activity worldwide, fueled to a large degree by rising foreign capital, according to Mitch Germain, an analyst with JMP Securities. Combined with an uptick in fundraising by alternative investors in the market, commingled capital volume has risen 16% over prior-year levels.

CBRE, which raised $5 billion in investment management equity in 2013, has attracted an additional $2.2 billion of new capital through the first four months of 2014 alone, typically a slower time for real estate trades. Many of those funds are flowing across national borders into foreign property markets.

"We are meeting with increasing success in raising capital to be moved from one region of the world to the other -- particularly from Asia -- to the other regions of the world, both in [private equity] funds and in separate accounts," said Bob Sulentic, CBRE president and CEO.

Serving international clients looking to do business in the U.S. was also a factor in the latest CRE services industry merger, the announced $260 million acquisition by London-based Savills of tenant representation specialists Studley, based in New York City. The deal, which is expected to propel Savills strongly into the U.S., is expected to close by May 30.

"As global real estate advisor, we have to be strong in the U.S. We've been number one in many of the Asian markets where this money is coming from, so there's no doubt there's pressure from our Asian colleagues to be able to assist their clients investing in the States," Savills CEO Jeremy Helsby tells CoStar.

While China's economic issues may produce a hiccup in cross-border deal flow, there will be much more investment into U.S. real estate over the next five years from China, Korea, Singapore and other countries, Helsby says. The merger also allows Savills to help service international tenants, particularly from Asia, looking for U.S. space.

The REIT Space For Offshore Capital

REITs lucky enough to own assets In Boston, San Francisco, New York City, San Francisco and other major U.S. gateway markets are also seeing the upswing in cross-border investment. Offshore capital has played a major role in both rising transaction pricing and investor traffic, Boston Properties (NYSE: BXP) CEO Owen D. Thomas told analysts in recent earnings call.

In one of last year's largest CRE transactions, the $1.4 billion sale of a 40% interest in New York City's GM Building, both the buyer and seller were foreign entities. Entities of Chinese developer Zhang Xin and Brazil’s Safra banking conglomerate bought the stake from an opportunity fund operated by Goldman Sachs Group Inc. on behalf of a Dubai-based private-equity firm and the sovereign wealth funds of Kuwait and Qatar. Boston Properties owns the majority 60% interest in the building.

"The flows are certainly increasing from non-U.S. buyers: sovereign wealth funds (SWFs), pension funds, other pools of capital, Asia, Canada, Europe and the Middle East," Thomas said. "It's a major force in the marketplace."

Betting on future economic growth as the recovery ripples across the country, select markets outside the six largest U.S. cities are now also angling for foreign buyers, noted Mark Gibson, CEO of investment sales and financing specialist HFF, Inc. (NYSE: HFF).

Cross-border buyers acquiring large industrial portfolios for sale have in some cases bid assets to "crazy prices," said Jack A. Cuneo, president and CEO of warehouse and office owner Chambers Street Properties (NYSE: CSG). As it bids to fill its own acquisition pipeline, Chambers Street is running up against cash-flush foreign buyers willing to pay the so-called "portfolios premium."

"Pricing has been pretty aggressive. There’s been a lot of competition, and sovereign wealth funds have come in fairly strong in the industrial space," Cuneo said.

The hotel sector is also seeing strong interest from international buyers, noted W. Edward Walter, president and CEO of Host Hotels & Resorts, Inc. (NYSE: HST).

"Our world is becoming more and more of a global marketplace from investments," Walter said, with investors from Asia, the Middle East competing in the same space for luxury hotels in high-demand markets. "The larger players, especially some of the SWFs, are active across really every jurisdiction and we run up against them on transactions on a consistent basis."

Offshore investment in the U.S. hotel market is expected to increase 50% to $3 billion this year as those Middle East and Asian conglomerates, family businesses and state-owned enterprises scoop up properties in gateway markets like Los Angeles, New York and San Francisco, according to JLL’s Hotels & Hospitality Group.